Shares transferred to customers, pledges can’t be accessed by lenders now
NSDL said it has transferred securities into the accounts of clients who had paid in full for their securities
Mumbai: The National Securities Depository Ltd (NSDL) on Monday unilaterally transferred back to client accounts the securities that Karvy Stock Broking Ltd had illegally pledged with lenders, on a day Bajaj Finance Ltd moved the Securities Appellate Tribunal (SAT) to access the same securities.
The NSDL move, which comes as a relief for 90% of Karvy clients, shuts out lenders from accessing client securities pledged with them, unless the appellate tribunal reverses the transfer.
According to a Sebi order on 22 November, Karvy illegally pledged client securities with lenders and raised money, some of which was diverted to its real estate business. The order barred Karvy from signing up new clients and stopped lenders from accessing the pledged shares. Bajaj Finance, which claims to have lent ₹345 crore to Karvy, is one of the lenders affected by the Sebi order.
The depository has transferred securities worth ₹2,013.77 crore back into the accounts of 83,806 clients, which is over 90% of the estimated bank exposure. A Mint report on Friday had said that 95,000 clients were awaiting payouts from Karvy; NSDL’s transfer leaves around 11,000 clients still awaiting payout, including cash payout, from Karvy.
“This move may lead to more litigation as it seems that NSDL’s move to transfer securities to clients’ accounts was done in the absence of any specific Sebi directive. In transferring these securities, the depository seems to have ignored the third party lien marked on such securities. By doing so, the sanctity of the pledges appears to have been diluted," said Tushar Ajinkya, senior partner at law firm ELP.
Bajaj Finance’s SAT petition sought an interim restriction on transferring shares to clients’ accounts. On behalf of Sebi, Rafique Dada, assisted by Anubhav Ghosh, Partner at Law Point, argued that SAT cannot give relief as the relevant parties—NSE and NSDL—have not been included in the case. Sebi also argued that Bajaj Finance did not conduct proper due diligence in verifying whether the shares belonged to the brokerage or to the clients. It said Bajaj Finance had relied on Karvy’s undertaking. The tribunal heard the petition and reserved it for orders on Tuesday.
According to Registrar of Companies (RoC) charge documents, only five private banks and one NBFC—Aditya Birla Finance—had fund-based exposures to Karvy against pledges. However, Bajaj Finance’s plea indicates more lenders are likely to have non-fund exposures.
A Mint report indicated that so far, Sebi has estimated the total exposure of lenders to Karvy at ₹2,800 crore.
According to Bajaj Finance’s petition, reviewed by Mint, Karvy had even extended the sanctioned limit and taken an overdraft. Starting September, it had started defaulting on repayments.
On 20 November, Bajaj Finance issued a loan recall notice to Karvy and the pledges against the loan would have been invoked on 23 November. Interestingly, just a day earlier, on 22 November, Sebi had barred depositories from transferring securities from Karvy’s account except to beneficial owners or clients who had paid in full. The petition also says Karvy had given a false undertaking to Bajaj Finance that these securities belonged to the brokerage.
The 22 November Sebi order, followed a preliminary report by National Stock Exchange of India, which indicated that Karvy had merged clients’ securities with its own securities and used the clients’ securities to borrow. These funds, or money received due to selling off these securities, were transferred to related company businesses, specifically its real estate business.
“Sebi and the depository move seems to come from a point of equitability and trying to safeguard small investors. The banks anyway have a number of avenues to recover their dues by filing a fraud case or even approaching National Company Law Tribunal under bankruptcy proceedings," said a lawyer who did not wish to be named as he is representing one of the stakeholders.
Fearing that Karvy’s lenders may approach the Bombay high court for possession of shares, Sebi also filed caveats in the court through its law firm, Law Point, to ensure such a plea is not heard in its absence.